How Square Makes Money

How Square makes money

Square Inc. is unique for two key reasons.

First, it is currently the only listed company to be run by the CEO of another listed company. Specifically, Jack Dorsey is the CEO of both Square Inc. and Twitter. Secondly, and perhaps the main point that people are paying attention to is the fact that Square’s stock price grew almost 2300% (at the time of writing), or equivalently, a +87% compounded annual growth rate since its IPO!

In this article, we aim to dissect how Square makes money, how does Square work, its subsidiaries and its growth strategy.

Finally, we also share our view on Square Inc.’s recent Bitcoin investment.



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    An introduction to Square Inc.

    Founded by Jim McKelvey and Jack Dorsey, also Twitter’s CEO, Square Inc. is a San Francisco based financial services, merchant services aggregator and mobile payment company founded in 2009.

    At present, Square’s products include Square Reader, Square Stand and Cash App (formerly Square Cash). On the other hand, Square’s subsidiaries has seen significant growth over the years.

    Square Card Reader.
    The company derived its name from its square-shaped card readers.

    The launch of Square Capital in 2014, which offers business financing to merchants using Square, and Square Payroll in 2015, which enables merchants to process payroll, are just one of the few examples.

    More recently, Square is launching Square Financial Services in 2021 after having receiving approval in 2020 from the Federal Deposit Insurance Corporation (FDIC).

    How does Square make money

    To understand how Square make money, it is important to first understand how does Square work, broadly.

    Square has four key revenue streams.

    Firstly, transaction-based revenue, arguably the key driver of the business. As per any payment companies today, Square derives fees per transaction from its merchant. This ranges from 1.75% to 2.9%, net.

    Secondly, subscription and services-based revenue. These are revenue from Cash App, Square Capital and Instant Transfers from sellers. Given the significance of Cash App, we will go through in more detail in the next section.

    Thirdly, hardware revenue. This consists of revenue from sales of contactless and chip readers, such as Square Stand, Square Register, Square Terminal etc.

    Finally, a relatively new segment – Bitcoin revenue. Specifically, Square now allows its Cash App customers to purchase Bitcoin, a cryptocurrency. Revenue are recognized when customers purchase bitcoin.

    And there go, a straightforward write-up on how does Square make money and how it works.

    How does Cash App make money

    Formerly known as Square Cash, Cash App is a mobile payment service allowing users to transfer money via mobile phone. Since 2017, Cash App’s monthly active users grew from 7 million to 30 million in 2020.

    One of the fastest growing financial product, Cash App grew from a simple product to one with multiple verticals today.

    Specifically, besides its peer-to-peer payment solution, it also offers banking, zero-commission stock trading and investing and cash card.

    With its product suite, Cash App makes money via subscription and transaction-based revenue stream. Specifically, transaction fees from Cash App Instant Deposit and Cash Card, as well as fees from business accounts.

    The introduction of bitcoin trading has also significantly improve Cash App’s profitability, adding to its growing list of revenue stream.

    Square growth strategy

    Like many technology-enabled companies, Square’s growth strategy relies heavily on its marketing and research spend, with the goal to reach critical mass.

    Looking at the graph on the right, sales and marketing costs having been generally stable over the years, around 11-13% of net revenue. The sharp increase in 2020 was majority due to processing costs and transaction losses associated with the increased volume of activities stemming from the pandemic.

    How Square makes money
    Square’s sales and marketing costs as a % of net revenue. Source: 10-K filings.

    While Square may appear to be a leader in certain segments, it faces stiff competitions and threats from both traditional financial institutions and incumbents. Among Square’s peers are Paypal (PYPL), Adyen (ADYEN.AS), Stripe and Revolut, just to name a few.

    We envision Square’s growth strategy to remain stable for the next 3-5 years, while improving efficiency of acquiring merchants.

    So far, Square provides an answer for smaller merchants looking for a quick, seamless and cost effective payment solution. The target remains to breach into the larger merchant segment, which it has been gradually positioning itself towards.

    Only time will tell if its growth strategy into new segments will work. Nevertheless, the market remains lowly penetrated and presents a huge opportunity for all.

    Square's foray into Bitcoin

    Square’s recent direct bitcoin investment should bring no surprise to the market. In fact, Square has previously invested in bitcoin from a product, leadership and legal innovation perspective.

    The press release disclosed that Square bought ~4,709 bitcoin at an aggregate purchase price of $50 million, or ~$10,610 per bitcoin. At the time of writing, Square made a ~80% unrealized gain!

    Its foray into cryptocurrency might spell some of its future strategy, namely expanding in to other cryptocurrencies such as Ethereum. More importantly, Square believes that the cryptocurrencies, especially Bitcoin, has the potential to a more circulated universal currency.

    One of its peers, PayPal, also has recently allow Bitcoin and crypto spending. We expect other global payment companies to follow suit.

    As we discussed previously in our newsletter, this could be an inflection point for the global financial sector in the adoption of cryptocurrencies.


    There’s no doubt about Square’s potential growth opportunities. With the stock returning ~22x since its IPO in 2015, expectations are sky high. Trading ~$95 billion in market cap, Square is similar in size with Charles Schwab (SCHW) and American Express (AXP)!

    While Square’s future seem promising, investors’ patience on the lack of profitability will soon run out. Square will need to prove that its growth initiatives into banking and bitcoin will be RoI enhancing in the medium term.

    In our view, the secular trend of e-commerce will continue to benefit and cater for Square’s evolution into a world-class financial technology company.

    Despite its growth opportunity set, we are cautious given the high valuation. That being said, we think Square should use its relatively strong market valuation to acquire businesses that will further hasten its road to greater profitability!



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